Source: NTMA

Standard & Poor's Ratings Services said on Tuesday that it lowered its long-term sovereign credit rating on the Republic of Ireland to 'AA-' from 'AA'. At the same time, the 'A-1+' short-term rating was affirmed. The agency said the outlook is negative. Public debt is expected to rise to 113% of GDP in 2012 and the estimated cost of the banking rescue has been raised to €90bn - - 58% of GDP (gross domestic product).

The downgrade to 'AA-', implying a greater risk of default, applies to other ratings that are dependent on the sovereign credit rating on Ireland, including the issuer credit rating on the National Asset Management Agency (NAMA), and the senior unsecured debt ratings on government-guaranteed securities of Irish banks.

"The downgrade reflects our opinion that the rising budgetary cost of supporting the Irish financial sector will further weaken the government's fiscal flexibility over the medium term," said Standard & Poor's credit analyst Trevor Cullinan. In light of the recent announcement of new capital injections into Anglo Irish Bank Corp. Ltd. (BBB/Watch Neg/A-2), the updated projections suggest that Ireland's net general government debt will rise toward 113% of GDP in 2012. S&P said this is more than 1.5 times the median for the average of Eurozone sovereigns, and well above the debt burdens we project for similarly rated Eurozone sovereigns such as Belgium (98%; AA+/Stable/A-1+) and Spain (65%; AA/Negative/A-1+).

The agency said that after a decade of rapid credit growth, which greatly increased the risk profile of Irish banks, the Irish government has adopted what S&P view as a proactive and transparent approach to dealing with the financial sector's difficulties. "We believe this should help foster a gradual recovery of the Irish economy over the medium term. Nonetheless, we believe that the government's support of the banking sector represents a substantial and increasing fiscal burden, which in our view will be slow to unwind.," S&P said.

The agency has increased its estimate of the cumulative total cost to the government of providing support to the banking sector from about €80bn to €90bn (58% of GDP).

The estimate includes two main components: the upper end of its estimate of the capital it expects to be provided by the Irish government to improve the solvency of financial institutions, and the liabilities expected to be incurred in exchange for impaired loans acquired from the banks.

The estimate of the cost to the Irish government of recapitalizing financial institutions rises to €45bn-€50bn (29%-32% of GDP) from €30bn-€35bn (19%-22% of GDP).

A spokesman from the Irish debt management agency, the National Treasury Mangement Agency (NTMA), described the recapitalization cost and expected NAMA'a €40bn in losses, as extreme.

"The negative outlook reflects our view that the rating could be lowered again if -- as a result of its support for the financial sector or due to a more sluggish economic recovery -- the government's fiscal performance improves more slowly than we currently assume," said Trevor. Cullinan. Conversely, he said the outlook could be revised to stable if the Irish government looks more likely to achieve its fiscal target for the underlying general government deficit of less than 3% of GDP by 2014, or if the banking sector stabilizes more quickly and at a lower fiscal cost to the government than now thought likely.

Concerns about the fragility of the economic recovery in Europe and the US, has prompted a market move into perceived safe government bonds, triggering a rise in the price of the bond with a fixed interest rate to security, thereby pushing the yield lower.

German 10-year government bond yields fell to a record 2.14% on Tuesday, closing at 2.18% compared with the equivalent Irish bond rate at 5.35%.

The interest rate spread of  317 basis points (3.17%), was the biggest since the launch of the euro in 1999.

Two-year US Treasury yields dipped to an all-time low of 0.454% on Tuesday and 10-year UK gilt yields declined to a record 2.847%.